FCC Must Run Honest Auctions

“America’s global leadership in mobile, and the strategic bandwidth advantage so many have worked hard to create, is being threatened by the looming spectrum crunch,” recently departed Federal Communications (FCC) Chairman Julius Genachowski said.

But while Genachowski asked Congress to authorize incentive auctions to free up spectrum, he also opposed language to require free and fair auctions to the highest bidder. Instead, he wanted the authority to micromanage auction rules to pick winner and losers, effectively handing spectrum to smaller players at below-market prices by excluding the largest carriers, AT&T and Verizon.

“The legislation makes clear that any party that is able to meet specific, traditional qualifications to hold a spectrum license is entitled to participate in the auction, and cannot be excluded,” Reps. Fred Upton and Greg Walden said when the spectrum auctions were included in the payroll tax extender bill they negotiated in early 2012. “Recent history has shown the Commission meddling in auctions and trying to ‘shape’ the market not only reduces federal revenue, it harms competition and spectrum policy. The new law puts a stop to this subjective and arbitrary practice. Congress sets the policy, not independent agencies. We will be watching closely, ensuring the FCC follows the law.”

Unfortunately, there are ominous signs that the FCC is contemplating doing precisely what the legislation sought to prevent: arbitrarily shaping auction outcomes. And Congress left the door open by including language clarifying the FCC retains the authority “to adopt and enforce rules of general applicability, including rules concerning spectrum aggregation that promote competition.”

And now the Department of Justice has weighed in with comments urging a rigged auction design.

The stakes are high for consumers and taxpayers.

Consumers have benefited tremendously over the past couple of decades as more spectrum has become available – while the industry has become more, not less concentrated. The capital required to deploy a modern mobile broadband network is staggering and there are large efficiencies of scale. So intense competition between a small number of competitors is to be expected, and serves consumers well.

Moreover, as the Phoenix Center for Advanced Legal and Economic Public Policy Studies showed in their landmark paper Wireless Competition Under Spectrum Exhaust, given the impending spectrum crunch, increasing the number of competitors will actually cause consumer harm: higher prices and more network congestion, as the largest carriers strain to meet demand.

Taxpayers also stand to be big losers if the FCC rigs the auction. An economic analysis conducted by former Congressional Budget Office (CBO) director Douglas Holtz-Eakin and former CBO principal analyst Coleman Bazelon for the Georgetown Center for Business and Public Policy found that excluding AT&T and Verizon from the auctions would reduce proceeds by up to 40 percent, or about $12 billion, jeopardizing funding for a new national public safety network and increasing the federal deficit.

A second chapter of the report, from a former top adviser to President Clinton, Robert J. Shapiro, found that, denied needed spectrum, AT&T and Verizon would be forced to manage capacity in less-effective, more expensive ways that would destroy more than 118,000 jobs by 2017.

If nominee Tom Wheeler is confirmed as FCC chairman, his most important job will be conducting these auctions. It’s therefore critical that the Senate Commerce Committee get a clear commitment from him that he will not rig the auctions in a way that would harm consumers and taxpayers by excluding legitimate bidders.